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Suze Orman Throws Down..........:)
Old 09-12-2013, 10:43 AM   #1
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Suze Orman Throws Down..........:)

Suze Orman says

I agree with her WL take. Most people don't need WL. It can be a good wealth transfer vehicle for estates $5 million and up if done right.

She is mostly entertainment but does give education at times......
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Revocable Living Trust
Old 09-12-2013, 10:48 AM   #2
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Revocable Living Trust

I spent my career in the trust business, and Suze Orman is the only person I've ever heard refer to a Revocable Living Trust as a "Living Revocable Trust". I don't know where she came up with that, but it's like fingernails on a blackboard every time I hear her say it. I suppose I could easily stop listening to her program, but I guess it makes me feel good about myself to listen to all the problems of others.
Bruce
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Old 09-12-2013, 11:50 AM   #3
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I agree about avoiding Whole Life Insurance

I sort of agree about SPIAs. You need to be aware of the interest rate (not pay out rate) you are getting and understand the effects of inflation. But there are some products that are still good as part of an income portfolio; I'm thinking of TIAA-Traditional which is currently paying me 4.4% in the accumulation phase (way better than most of my fixed income) and has a vintage system for payout interest rates that will give me 5.5%. There is also a graduated payout system which helps account for inflation.

Hmm bond funds. Well a bond fund has a duration and if you are going to invest for time periods longer than that and not sell as soon as interest rate increases cause your bond prices to drop you will be ok. When does Suze advise getting back into bonds, how would she set up an AA. Bond funds are for income, not capital gains, if you don't sell at a loss you'll be ok, just hold tight and enjoy the increased income with higher interest rates.
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Old 09-12-2013, 12:18 PM   #4
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Hmm bond funds. Well a bond fund has a duration and if you are going to invest for time periods longer than that and not sell as soon as interest rate increases cause your bond prices to drop you will be ok. When does Suze advise getting back into bonds, how would she set up an AA. Bond funds are for income, not capital gains, if you don't sell at a loss you'll be ok, just hold tight and enjoy the increased income with higher interest rates.
Well, no one ever said Suze was a financial guru. After all, she used to consult her "crystals" to ask them what stocks her clients should buy when she worked for a wirehouse back in the day........
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Old 09-12-2013, 12:51 PM   #5
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Hmm bond funds. Well a bond fund has a duration and if you are going to invest for time periods longer than that and not sell as soon as interest rate increases cause your bond prices to drop you will be ok. When does Suze advise getting back into bonds, how would she set up an AA. Bond funds are for income, not capital gains, if you don't sell at a loss you'll be ok, just hold tight and enjoy the increased income with higher interest rates.
Avoid WL - check
Avoid SPIA - check unless you know you'll live a real long time
Avoid Bond Funds - double check especially now

If you have a bond fund with a nominal 10 year maturity the fund manager may typically buy 12 year bonds and sell 8 year bonds. Nothing is typically held to maturity. The selling of the bonds cements to loss of principal in rising interest rates.

Yes, the apparent yield increases but only because you have lost principal. Your income remains the same assuming there are no defaults. You will never regain this lost principal until rates fall back to the level that you purchased the fund.

If you buy individual bonds and CDs, you will receive the whole principal (excluding defaults) at maturity. If you buy nominal 10 year paper, you will receive that 10 year interest rate/income for the entire period. At maturity the entire principal can be reinvested at the higher interest rate.
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Suze's Throw Down
Old 09-12-2013, 01:07 PM   #6
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Suze's Throw Down

Suze's throw downs usually make me want to throw up, but these three actually make sense.
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Old 09-12-2013, 01:43 PM   #7
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My advice would be that if you want to be in a bond fund, put it in a short term bond fund.
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Old 09-12-2013, 02:00 PM   #8
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If you have a bond fund with a nominal 10 year maturity the fund manager may typically buy 12 year bonds and sell 8 year bonds. Nothing is typically held to maturity. The selling of the bonds cements to loss of principal in rising interest rates.

Yes, the apparent yield increases but only because you have lost principal. Your income remains the same assuming there are no defaults. You will never regain this lost principal until rates fall back to the level that you purchased the fund.

If you buy individual bonds and CDs, you will receive the whole principal (excluding defaults) at maturity. If you buy nominal 10 year paper, you will receive that 10 year interest rate/income for the entire period. At maturity the entire principal can be reinvested at the higher interest rate.
I like the diversity of a bond fund and low costs. Also the flexibility is nice in that I'm not locked into the rate on individual bonds as new bonds are added as older ones come close to maturity.
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Old 09-12-2013, 02:22 PM   #9
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I like the diversity of a bond fund and low costs. Also the flexibility is nice in that I'm not locked into the rate on individual bonds as new bonds are added as older ones come close to maturity.
Yes, but as mentioned most bond funds sell individual bonds before maturity, locking in the loss. If a bond fund follows an index, it's going to lock in the losses of the index. For instance, one index doesn't hold any bonds with a maturity of less than one year. Any bond that hits the one year mark gets sold.

With individual bonds, your yield is locked in with your purchase price. As long as you hold to maturity, the final yield doesn't change. I ignore pricing variations, as it will ultimately end up at $100. Okay, I lied, I sold one bond when the price went high enough to give me 3 years of 5% interest payments in one year.
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Old 09-12-2013, 02:39 PM   #10
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Yes, but as mentioned most bond funds sell individual bonds before maturity, locking in the loss. If a bond fund follows an index, it's going to lock in the losses of the index. For instance, one index doesn't hold any bonds with a maturity of less than one year. Any bond that hits the one year mark gets sold.

With individual bonds, your yield is locked in with your purchase price. As long as you hold to maturity, the final yield doesn't change. I ignore pricing variations, as it will ultimately end up at $100. Okay, I lied, I sold one bond when the price went high enough to give me 3 years of 5% interest payments in one year.
Sure, but has anyone actually compared the performance of a bond ladder held to maturity to that of an index bond fund, of course risk would me more difficult to compare and as we are at historic lows you'd always want to model for a recovery and increase in interest rates. But I hear everyone saying go to individual bonds so you can hold to maturity, but are there any numbers? You are certainly getting back principal if you hold a bond to maturity, but if interest rates rise you'll be getting a below market coupon rate while the bond fund investor will be getting the higher market rate.
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Old 09-12-2013, 03:15 PM   #11
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Sure, but has anyone actually compared the performance of a bond ladder held to maturity to that of an index bond fund, of course risk would me more difficult to compare and as we are at historic lows you'd always want to model for a recovery and increase in interest rates. But I hear everyone saying go to individual bonds so you can hold to maturity, but are there any numbers? You are certainly getting back principal if you hold a bond to maturity, but if interest rates rise you'll be getting a below market coupon rate while the bond fund investor will be getting the higher market rate.
This is correct, and illustrates why a bond fund is no more likely to suffer losses than individual bonds, assuming that investors buy and hold the bond fund for a period of time at least equal to the fund's duration.

I understand the psychological benefit of being able to say, "I'll get my principal back, as long as I hold my bonds to maturity", but the benefit is strictly psychological. Sitting on a low yielding bond until it matures is just a way to string out the pain of being stuck in a poor investment over the lifetime of the bond. The people (or mutual funds) who sell immediately, realize their losses, and purchase bonds with higher yields will recoup their principal loss from the higher yield, and end up with the same return as the people who buy and hold until maturity.
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Old 09-12-2013, 04:18 PM   #12
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This is correct, and illustrates why a bond fund is no more likely to suffer losses than individual bonds, assuming that investors buy and hold the bond fund for a period of time at least equal to the fund's duration.
Would that analysis stand up to the panic selling problem. Panic is probably too strong, but say we have another "everything is going down" period. People flee to cash, so the bond fund managers are forced to sell low to get that cash. If you ride out the storm, don't you end up getting hurt?
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Old 09-12-2013, 06:56 PM   #13
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The people (or mutual funds) who sell immediately, realize their losses, and purchase bonds with higher yields will recoup their principal loss from the higher yield, and end up with the same return as the people who buy and hold until maturity.
Would this always be true on an after-tax basis?
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Old 09-12-2013, 10:28 PM   #14
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Suze's throw downs usually make me want to throw up, but these three actually make sense.
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Old 09-13-2013, 02:24 AM   #15
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OK on WL and SPIAs (at present for sure) but what does she recommend instead of bond funds? All stock and/or cash? Anyone can point out risks, a "financial guru" might have some solid alternatives to recommend. I don't follow her, it appears she's helpful RE: budgeting, saving, LBYM but inconsistent at best when it comes to investing.
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Old 09-13-2013, 06:37 AM   #16
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Sure, but has anyone actually compared the performance of a bond ladder held to maturity to that of an index bond fund, of course risk would me more difficult to compare and as we are at historic lows you'd always want to model for a recovery and increase in interest rates. But I hear everyone saying go to individual bonds so you can hold to maturity, but are there any numbers? You are certainly getting back principal if you hold a bond to maturity, but if interest rates rise you'll be getting a below market coupon rate while the bond fund investor will be getting the higher market rate.
I had the total cr*p kicked out of me when I had a long-term bond fund in the 1970's. I bought it when the LT interest rate was about 8%. I was happy until interest rates shot up in the 1980's. I lost a job and had to sell and took a serious loss. Fortunately, I didn't have all that much in assets at the time so I didn't lose that much. Now if I had held on for a few more decades, I'd be looking pretty good now.

The math is not complicated but the possible variations in interest rates are infinite. My comment was for a single step change up in interest rates. That results in a permanent drop in the NAV of the bond fund and a drop in the resale value of an individual bond/CD. Both yields increased with the interest rate rise but both suffered a loss in their current value. The bond/CD will eventually mature and the original principal amount returned. At that time the funds can be reinvested at the higer interest rate. The interest income will then be higher. For the bond fund the principal loss is permanent. The funds' income remains at the same level as before the rise in interest rates although the apparent yield is higher. Reinvestment of eithers' income is equally at the higher interest rate.

As for diversification, I have my fixed income in FDIC insured CDs so it is irrelevant. I have enough fixed income to create a diversified bond ladder but I'm in the group of people that has decided the fixed income part of my asset allocation has to be "totally safe." I've looked at high grade corporates and have decided that the small increase in yields aren't worth assuming any risk. Enron and Lehman (plus many other defaulters) were all investment grade at one point.
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Old 09-13-2013, 06:58 AM   #17
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I had the total cr*p kicked out of me when I had a long-term bond fund in the 1970's. I bought it when the LT interest rate was about 8%. I was happy until interest rates shot up in the 1980's. I lost a job and had to sell and took a serious loss. Fortunately, I didn't have all that much in assets at the time so I didn't lose that much. Now if I had held on for a few more decades, I'd be looking pretty good now.

The math is not complicated but the possible variations in interest rates are infinite. My comment was for a single step change up in interest rates. That results in a permanent drop in the NAV of the bond fund and a drop in the resale value of an individual bond/CD. Both yields increased with the interest rate rise but both suffered a loss in their current value. The bond/CD will eventually mature and the original principal amount returned. At that time the funds can be reinvested at the higer interest rate. The interest income will then be higher. For the bond fund the principal loss is permanent. The funds' income remains at the same level as before the rise in interest rates although the apparent yield is higher. Reinvestment of eithers' income is equally at the higher interest rate.
If rates increase the individual bond holder will continue to get the same income from their bond and if they hold to maturity they'll get back principal. The bond fund holder will get the extra income from the higher interest rate. The increased interest rate and permanent drop in the funds NAV produces the same outcome as the bond's stable interest rate (now below market) and return of principal at maturity. If you sell before that income can compensate you'll loose, but you'd loose if you sold the individual bond too, because who wants a bond with below market coupon. Individual bonds are good psychologically as they give you a date to control your selling and the guarantee of getting your principal back. If you hold your bond funds in a similar way you'll get similar results. 4% on the individual bond plus the price at maturity will equal 5% (say) on the bond fund with lower NAV.

William Bernstein puts it as follows:
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It’s true; when rates rise, the price of your mutual fund falls, but from that point forward you’re getting the market rate of interest. With individual bonds, you won’t take a loss at maturity, but until then you have to bear the pain of a crummy coupon. With the bond fund, you’re ripping the bandage off quickly; with the individual bond, you’re doing it slowly. The end result is precisely the same.
When you factor in the costs and the trouble of setting up a bond ladder I think the bond fund wins. Still I admire firms like Guggenheim for coming up with target date bond funds as they will sweep up a lot of folks who are convinced that they should not be in regular bond funds, but are intimidated by setting up an individual bond ladder. It's excellent marketing.
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Old 09-13-2013, 10:33 AM   #18
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Would this always be true on an after-tax basis?
As a general rule, investors should hold their bond funds in tax advantaged accounts, in which case there would be no difference in before-tax and after-tax returns. As as second general rule, if it's possible to sell losers in a taxable accounts and establish a capital loss for tax purposes, investors should do so in order to get the deduction from current income.

That said, tax law is very complicated and future tax rates are unpredictable, so I wouldn't be so bold as to say selling is always better on an after-tax basis. But I would have to see a convincing argument in favor of holding losers, since the tax benefits of selling are obvious and immediate. YMMV
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Old 09-13-2013, 10:42 AM   #19
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I couldn't access that link, but Suze Orman's advice is often inconsistent. I enjoy these financial shows (hers included), but I wish she'd chuck the "Everyone needs a trust" advice. Also, she's turned people into Fico Fanatics (while, initially, not disclosing her relationship with Fair, Isaac).

Parade featured her about 6 years ago, and let's just say she doesn't respond well to criticism (or those who'd give differing advice). She spoke of another, unnamed financial advisor who took issue with some of her advice, then proceeded to say that she "looked into his background" and crowed that she's able to do that. She sniffed that he (gasp!) had a $100K home and drove a junker.

So much for Orman's advice that people live within their means.

P.S. LOL What's up with the "dryer sheets" and how'd that get beneath my nic?
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Old 09-13-2013, 10:58 AM   #20
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William Bernstein puts it as follows:

"It’s true; when rates rise, the price of your mutual fund falls, but from that point forward you’re getting the market rate of interest. With individual bonds, you won’t take a loss at maturity, but until then you have to bear the pain of a crummy coupon. With the bond fund, you’re ripping the bandage off quickly; with the individual bond, you’re doing it slowly. The end result is precisely the same."

When you factor in the costs and the trouble of setting up a bond ladder I think the bond fund wins. Still I admire firms like Guggenheim for coming up with target date bond funds as they will sweep up a lot of folks who are convinced that they should not be in regular bond funds, but are intimidated by setting up an individual bond ladder. It's excellent marketing.
William Bernstein is wrong.

The bond fund and individual bonds all lose the same amount of value. They are both paying the same amount of interest even though there is the illusion of "market interest rates" on the bond fund versus the "crummy coupon" on the individual bond.

The only difference is that at maturity the individual bond is suddenly worth its full face value. The bond fund will never return to its original share price until the interest rates go back down.

I do not find buying brokered CDs the least bit intimidating. I currently have 20 CDs spread out over 2 years due to absurdly low rates so I buy a new one about every month. My goal is to spread out to 5 years as interest rates (hopefully) rise. If I see really high rates, I would probably stretch out to 10 years. At 5 years, I would buy a CD every quarter. At 10 years, it would be every 6 month. That's hardly an oppressive work load.
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